Revenue Based Financing: 5 Different Options, Marketing Confusion

Revenue Based Financing Confusion

Revenue Based Financing sits in one of the most confusing corners of the financing market for growing companies. Currently this intersection has five very different “products” with at least 11 overlapping names, including:

  • Business cash advance
  • Revenue based advance
  • Revenue based financing
  • Revenue based loan
  • Revenue capital
  • Revenue loan
  • Revenue sharing
  • Royalty based financing
  • Royalty based growth capital
  • Royalty loan
  • Income Participation Loan.

For consistency sake we call the five different types of products:

  • Revenue Cash Advance
  • Revenue Sharing Loan
  • Loans With Revenue Kickers
  • Permanent Revenue Dividend
  • Royalty Stream Advance

Our names have zero overlap with the confusing and overlapping marketing names given to these products. But hopefully they are better at describing what type of financing is being offered.

Revenue Cash Advance

The Revenue Cash Advance is a cousin to the more widely marketed Merchant Cash Advance. Both of them:

  • Are short term loans (3 to 18 months)
  • Have high interest rates
  • Take payments from a percentage of revenue
  • Collect payments very frequently – usually daily, sometimes weekly
  • Are available to companies with customers and revenue but that lack a strong credit history
  • Provide approval and cash advances quickly.

The primary difference between the two cousins is that the Revenue Cash Advance payment is deducted from a company’s bank account, while a Merchant Cash Advance payment is deducted from a company’s merchant account credit card receipts.

The following short list of Revenue Cash Advance providers is NOT vetted and you should use caution in looking at their offerings. We’ve included their description of what they offer in “quotes” to illustrate the marketing confusion that comes from different names for very similar financial offerings.

As you can see, three out of five call themselves Revenue Based Financing, but these products are very different from the next category that also often uses the term Revenue Based Financing!

Revenue Sharing Loan

This promising form of growth capital has been around for many decades in industries such as oil and gas exploration. More recently there are investor funds using Revenue Sharing Loans for Software as a Service (SaaS) companies; equity crowdfunding sites offering it as an alternative to equity; and impact focused investors offering Revenue Sharing Loans as part of a portfolio of financing options.

Revenue sharing loans:

  • are medium term loans (typically 2 to 5 years)
  • have high interest rates that some business owners prefer to selling equity
  • take payments based on a percentage of revenue (unlike fixed payments of conventional loans) that are often much lower than a Revenue Cash Advance (5% of revenue is typical for Revenue Sharing Loans)
  • collect payments monthly (typically)
  • are available to companies with a strong growth history and growth projection, and a high gross margin
  • take longer to get approvals and cash than online business loans (meaning Revenue Cash Advances), but are often faster than SBA loans or venture capital.

The firms offering Revenue Sharing Loans are remarkably varied, as are the marketing names they use to describe very similar offerings! The following firms serve companies that are traditionally thought of as a fit for angel or venture capital equity investment:

  • Armentum Partners (“Royalty Financing”) provides large growth debt transactions ($7M to $50M) to healthcare and technology companies.
  • Cypress Growth Capital (“Royalty Based Growth Capital”) targets US software or tech companies with revenue of $3M to $30M looking for up to $5M in capital.
  • Decathlon Capital Partners (“Revenue-Based Funding”) seeks US companies with $3M to $75M in revenue, and is affiliated with venture capital firm Crescendo Ventures.
  • Greenville Strategic Royalty Corp. (“Royalty financing”) provides $250K to $1M with monthly payments of 1% to 4% of revenue for companies with $3M – $50M in revenue and gross margins over 30%.
  • GSD Capital (“Revenue-based financing”) focuses on Mountain West US SaaS companies looking for $100K to $1M of financing.
  • Lighter Capital (“Revenue-based financing”) has funded 190+ technology companies with at least $15K monthly recurring revenue.
  • Next Step Capital Partners (“Revenue-sharing investments”) is focused on Texas high margin companies looking for $250K to $2M.
  • RiverSaaS Capital (“Revenue sharing” option) is a later stage ($1.5M/month minimum) venture debt company (debt with warrant kickers) that offers revenue sharing as an alternative payment plan versus its regular 2- to 3-year term loan offering.
  • Spinta Capital (“Royalty Loans” option) is a later stage debt provider with many options for “growth debt” of $3M to $50M, including its “royalty loans.”

In addition, five equity crowdfunding platforms are offering this type of financing as an alternative for companies:

Finally, there are two investors around the “impact investment” space that include Revenue Sharing Loans as an option.

  • Flexible Capital Fund (“Royalty financing”) is a Vermont based investor in sustainable agriculture with a number of different ways to fund the businesses with “near equity.”
  • Village Capital has a unique accelerator investment model (“entrepreneurs choose”), and we’re told that some of the investments made along the way have been Revenue Sharing Loans instead of equity.

Loans With Revenue Kickers

Sometimes debt providers want extra financial upside to balance out their perceived risk – a kicker. Adding a share of revenue – often called a Royalty in this space – on top of repayment of principal with interest is an option offered by a few niche providers.

  • Arctaris Michigan Partners (“GrowthDebt” or “Royalty Finance”) looks for Michigan companies with at least $5M in revenue, and provides 5-year standard term debt with a “royalty enhancement.”
  • Gazelle Finance (“Income Participating Loans”) has offices in Eastern Europe – Georgia and Armenia – and provides traditional loans with a revenue sharing kicker for rapidly growing SMEs.

Several organizations in this category are connected with a pioneer in developing this form of financing, Arthur L. Fox. These include:

  • Royalty Capital New England (“Royalty Based Financing”) is a fund that uses Fox’s methodology. According to the web site, the loan principal is repaid in 18 to 48 months, and then the royalty is delivering returns for anywhere from 8 to 13 years.
  • China Royalties is an exchange for all kinds of royalties including Loans With Revenue Kickers and Revenue Sharing Loans as well as intellectual property based royalties.
  • Pacific Royalties is an “education” site to teach companies about this method of financing.

Permanent Revenue Dividend

Well established companies with long track records of revenue and profitability may need capital for growth, acquisition, or for transferring ownership from retiring founders.

Permanent Revenue Dividend financing offers an attractive alternative to private equity because the returns for investors don’t require an exit. Instead, a share of revenue (1% to 4%) is provided in return for the capital. Unlike Revenue Sharing Loans, no repayment of principal is expected, but on the other hand the payments continue indefinitely.

Providers include:

  • Alaris Royalty North (“Non-Control Equity”) is based in Calgary, Alberta, Canada and is publicly traded.
  • Royalty North (“Royalty financing”) looks for companies with at least $10M in financing. They are also Canadian (Vancouver, British Columbia) and publicly traded.
  • Temperance Capital (“Royalty financing”) likes “boring” companies and is based in Toronto, Ontario, Canada. It also appears to have public owners of its investment fund.

Royalty Stream Advance

While Arthur Lipper and others have used the term “royalties” to refer to all company revenue, the more conventional use of “royalties” refers to income derived from licensing intellectual property such as music or patents. When such royalty streams are well established and likely to continue or grow in the future, it is possible to turn that future income stream into cash today.

The following firms offer Royalty Stream Advances for research organizations (such as universities or hospitals) and others that have licensed patents in health care:

For musicians, the Royalty Exchange is a marketplace for buying and selling music royalties. Another firm Sound Royalties offers a musician-friendly option that advances some cash but allows musicians to retain rights and future streams. At the high end private equity firm Round Hill Music Royalty Partners buys music catalogs.

Is Revenue Based Financing For You?

There are five very different types of financing products available under the broad category of Revenue Based Financing or Royalty Based Financing. And as we’ve indicated, the types of companies for whom RBF is a fit is quite diverse!

We’re going to kick this question down the road for now. Over time we will be doing more research into four of the five options – we won’t be covering Royalty Stream Advances again – and delve more deeply into how these options compare and contrast with other choices.

For now, though, use the above guide to sort through the numerous companies that might be a fit. And reach out if you want help on next steps!

 

Don Gooding

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